Tag: #chartoftheweek

ICAEW chart of the week: First half fiscal deficit

H1 2018-19 -£33.2bn fiscal deficit + £4.5bn growth + £1.8bn RBS dividends - £3.0bn lower revenues - £10.4bn higher spending = -£40.3bn fiscal deficit for H1 2019-20.

The ONS published the fiscal numbers for the first half of the UK Government’s 2019-20 financial year this morning, with the #icaewchartoftheweek illustrating the changes in comparison with the first half of last year.

If revenues had increased in line with economic growth then the deficit would have reduced by £4.5bn (net of the effect of inflation on both revenues and expenditures). Unfortunately, tax receipts have been relatively weak, coming in £3.0bn below growth, with higher national insurance and council tax receipts being more than offset by lower corporation tax, income tax, inheritance tax, fuel duties, excise duties, and stamp duty.

The Government’s preferred measure of the deficit (which excludes government-owned banks) did benefit from £1.8bn in dividends from the Royal Bank of Scotland.  

Expenditures were £10.4bn higher than the first half of last year, reflecting more spending on public services (including the NHS), Brexit preparations, a growth in the size of the civil service, and a £3bn or so increase in capital investment.

This means that there is a shortfall of £40.3bn between receipts of £395.5bn and expenditures of £435.7bn in the first half of this financial year, compared with £33.2bn for the same period last time, when receipts were £384.2bn and expenditures totalled £417.4bn. (The first half deficit last year was originally reported as £19.9bn. This was subsequently revised down to £19.3bn before £13.9bn in accounting changes, including irrecoverable student loans.)

Fortunately for the Chancellor, the deficit tends to be much lower in the second half of the year given the boost from self-assessment tax declarations in January. Despite this the deficit could exceed £50bn this year if trends continue, a big disappointment for those who had hoped to continue on the path to eliminating the deficit.

With warning signs over the economy flashing, these numbers do not provide an auspicious backdrop for the Budget on Wednesday 6 November when the Chancellor is hoping to announce a number of major tax cuts.

For further information go to:

ONS – Public sector finances, September 2019

OBR – Commentary on the Public Sector Finances: September 2019. 

ICAEW chart of the week: Bank of England banknotes

Chart: 396 x £5: £2.0bn | 1,052 x £10: £10.5bn | 2,006m x £20: £40.1bn | 344m x £50: £17.2bn.

The confirmation last week of the new design for the Bank of England £20 banknote prompted the #icaewchartoftheweek to look at the value of banknotes in circulation.

There are just over 2bn paper £20 notes in circulation together worth £40.1bn, more in both number and value terms that the polymer £5 note (396m worth £2.0bn), polymer £10 note (1,052m worth £10.5bn) and the paper £50 note (over 344m worth £17.2bn). This amounts to a total of £69.8bn, not including £4.3bn in high value notes issued to Scottish and Northern Irish banks that in turn print their own banknotes.

On average there are approximately 6 five pound, 17 ten pound, 32 twenty pound and 5 fifty pound notes in circulation for each person living in the UK.

Replacing the existing £20 note with a new polymer design featuring a young J M W Turner will be a much bigger exercise than it was for the £5 and £10 polymer replacements, albeit it is unclear as to how many will be missing in action, having been lost down the back of sofas, hidden away in cupboards, or otherwise misplaced over the 12 and a half years that the current version has been in circulation.

The Bank of England has said the new polymer £20 note will start to be circulated on 20 February 2020. However, it has yet to announce a firm date for the final withdrawal of the current paper £20 note, likely to be in early 2021. Fortunately, Bank of England banknotes remain exchangeable forever.

For more information, visit www.bankofengland.co.uk/news/2019/october/the-new-20-note-unveiled or www.bankofengland.co.uk/statistics/banknote.

ICAEW chart of the week: Welsh Government Budget

Chart: Welsh Government Budget 2019-20. Funding £20.6bn, Spending £20.6bn

This week’s #icaewchartoftheweek is on the subject of the Welsh Government’s Budget for the current financial year.

Officially a £19.4bn Budget to cover £16.3bn in Resource spending and £3.1bn in Capital investment, there is a further £1.2bn of spending funded by EU grants and other income to make a total of £20.6bn overall for 2019-20.

The largest element of funding comes from Whitehall in the form of a £13.7bn block grant, together with £1.3bn from the National Insurance Fund and £1.1bn in business rates. The block grant is lower than it used to be as the Welsh Government is now entitled to a £2.1bn share of income taxes and £0.3bn in other devolved taxes, which is supplemented by £0.2bn in borrowing and £0.7bn in other resources, before taking account of £0.7bn or so in grants from the EU and £0.5bn in other income.

The Welsh NHS takes the majority of the £8.6bn health and social care budget, with the balance supplementing local council budgets for social care, while grants of £5.5bn to local government, include the redistribution of the £1.1bn of business rates income.

The education budget of £2.7bn does not include the main schools’ funding streams (which in Wales is provided by local authorities), but it does include a substantial proportion of post-16 education funding, including £0.8bn in student loans, £0.4bn in student support grants and £0.4bn for further education.

Around half of the £1.4bn economy and transport budget is on capital investment in infrastructure, while the £0.8bn of spending by other departments comprises £0.6bn on environment, energy and rural affairs, and £0.2bn on international relations and the Welsh language. Central services and administration expenditure of £0.9bn includes £86m for the Welsh Assembly, Ombudsman and Audit Office, while the Welsh Government has £0.6bn in unallocated reserves that it can deploy if needed.

While the Chancellor has indicated that there will be more money in 2020-21, that is a still half a year away, and the use of the term ‘First Supplementary Budget’ could be an indication that the Welsh Government might be looking to submit a further budget request before the end of the financial year!

ICAEW chart of the week: fiscal changes

Chart: Fiscal methodology changes and error corrections. £23.6bn 2018-19 deficit before changes, £41.4bn changes after changes.

The public sector finances were subjected this week to some big methodology changes by the Office for National Statistics (ONS), as illustrated by the #icaewchartoftheweek.

At the same time, the ONS took the opportunity to fix some errors in the reported fiscal numbers, including a correction of £2.6bn in 2018-19 relating to double counting by HMRC within corporation tax revenues. This is an error that turns out to have been occurring for the last 7 years, raising questions over the quality of controls over fiscal reporting within government. 

There were also a number of other revisions to the numbers amounting to £1.5bn, increasing the reported deficit for 2018-19 from £23.6bn to £27.7bn before methodology changes.

The treatment of student loans in the fiscal measures has been misleading for many years, and the ONS have finally dealt with the ‘fiscal illusion’ this created (as the OBR describes such flaws in the National Accounts).

The new treatment increases the deficit in 2018-19 by £12.4bn, with a charge of £8.6bn for loans that are never expected to be recovered (just under half of the total loans extended in the year), the removal of £2.3bn in interest on student loans also not expected to be collected, and £1.5bn from the loss experienced on the sale of part of the student loan portfolio during last year.

The treatment of pension funds has changed too, with a £1.3bn increase in the deficit relating to how the Pension Protection Fund and local authority and other public sector pension funds are recorded.

Overall, the fiscal deficit for 2018-19 has been increased to £41.4bn, a 75% increase in the headline number from that previously reported.

Not shown in the chart is the effect on public sector net debt. This was not affected by the student loans change, but was reduced at 31 March 2019 from £1,802bn to £1,773bn as a consequence of eliminating £29bn owed to local authority and other pension funds, without reflecting the associated liability to public sector employees. We disagree with this elimination, which we think understates the headline measure for the national debt.

Despite this, the overall effect of these changes is to improve the reporting of the public finances. A positive step forward, even if there remains a long way to go.

Further information:

– UK public sector finances, 24 September 2019 (ONS)

– Commentary on the public sector finances (OBR)

ICAEW chart of the week: a trillion dollar deficit

Chart: A trillion dollar deficit. Revenue $3.6tn, Spending $4.6tn.

The #ICAEWchartoftheweek this week is on the US federal government budget. This is forecast by the Congressional Budget Office (CBO) to end the current financial year this month at just under a trillion dollars in deficit, with the budget shortfall in the year ended 30 September 2020 projected to exceed a trillion dollars for the first time.

Revenue in 2020 is expected to amount to $3,620bn. The largest contributions are from federal income taxes of $1,800bn and payroll taxes of $1,281bn, followed by a modest $245bn from corporate taxes and $294bn in other revenues.

This is projected to be $1,008bn less than planned spending by the federal government in 2020 of $4,628bn. Social security is expected to cost $1,097bn, while spending on Medicare, Medicaid and other health programmes are expected to cost $1,163bn net of receipts. Income security (welfare) programmes are expected to cost $302bn, while the balance of mandatory expenditure includes spending on military veterans and federal civilian and military retirement plans.

Discretionary spending of $1,400bn comprises $737bn on defense and $663bn on everything else apart from interest. This includes elementary and secondary education, housing assistance, international affairs, and the administration of justice, as well as outlays for highways and other programmes. Net interest is expected to cost $390bn.

The shortfall in revenues compared with spending will be funded by borrowing, with federal external debt expected to increase from $16.7tn to $17.8tn at the end of September 2020.

Federal revenues and spending are estimated to amount to 16.4% and 21.0% of GDP respectively in 2020, with the deficit equivalent to 4.6% of GDP. The CBO projects that the average federal deficit between 2020 to 2029 will be 4.7% of GDP, significantly higher than the 2.9% average over the last fifty years, resulting in federal debt growing from 79% of GDP in 2019 to 95% of GDP over the coming decade.

Of course, the federal budget does not give the full picture for the public finances in the US, with most state governments choosing (or being legally required) to run budget surpluses.

As with many developed economies, the public finances in the US are under increasing pressure with an increasingly long-lived population driving higher costs for social security, health and social care. With lower levels of economic growth (albeit currently much higher than in the UK or Europe) and a growing level of debt, there are concerns about the resilience of the US public finances if there were to be an economic downturn or another financial crisis in the medium term.

As summer turns into fall, it may be that a turn in economic seasons is on the way too. After all, winter is coming.

The full Congressional Budget Office report is available on cbo.gov.

ICAEW chart of the week: Schools budget up £14bn, or is it £1.2bn?

English schools budget 2020-21 +£2.6bn, 2021-22 +£4.8bn, 2022-23 +£7.1bn

The Prime Minister’s announcement of a ‘£14bn package’ of more money was welcome news for English schools as they prepare to re-open their doors after the summer holidays.

Unfortunately, as is common with government announcements, there is a tendency to add several years together to give a bigger headline, exacerbated this time by the inclusion of inflation to make the headline even bigger! 

In reality the announcement is a lot less exciting, as illustrated by the #ICAEWchartoftheweek. The announced increase in the 5-16 schools’ budget in three years’ time of £7.1bn (from £45.1bn in 2019-20 to £52.2bn in 2022-23) turns out to be £3.6bn, or an average of £1.2bn a year after taking account of inflation and the expected growth in the number of school pupils of around 2% over that time.

This is still very good news for schools trying to manage within constrained budgets, but (as the IFS and others have reported) the increase will still be insufficient to restore real-terms per pupil funding to the levels seen before the financial crisis. A 12% increase in pupil numbers since 2009-10 has seen budgets squeezed as funding has been constrained to inflation-only increases for most of the last decade.

Ironically, the Chancellor wasn’t able to take advantage of the same trick in his announcement the following day of £400m for further education and sixth forms, despite the fact that this was proportionately a bigger increase. The announcement was only for one year, so he couldn’t add multiple years together to create a bigger headline, and HM Treasury no doubt held the line about not adding in inflation.

Either way, these announcements are indication of how the fiscal approach is changing after a decade of austerity and struggling public services. This week’s Spending Review will give us a few more clues about the direction of public spending, although if (as rumoured) the Budget is postponed then we may not find out what the plans for taxes and borrowing to fund these increases until the Spring.

ICAEW chart of the week: A rush of capital spending in March

Our #ICAEWchartoftheweek this time is on the subject of public sector net investment. This is the government’s preferred measure of capital spending, including much needed investment in the UK’s economic and social infrastructure.

Over the years, the process for delivering capital expenditure in the public sector in the UK has had a pretty bad reputation. 

The anecdote goes that the first quarter is spent arguing about budgets, in the second everyone goes on holiday, and it is only in the third quarter that programmes finally get up and running, before everything stops for the Christmas break. The final quarter is then a mad rush to spend the remaining budget before the end of the financial year.

Unfortunately, there does appear to be some support for this conjecture when we take a look at the actual numbers.

According to the provisional financial results for the year released last week, around 41% of public sector net investment in 2018-19 was incurred in the last quarter. £8.2bn or 19% was reported in the last month alone!

Brexit has been an added complication in this particular financial year, with the government’s no-deal preparations in the run up to the end of March involving additional capital spending. Despite this, March was the peak month last year, as it has been over the years.

This is a stubbornly consistent feature of the public finances in the UK, even after numerous attempts within government to improve capital budgeting and delivery processes. For example, departments are now able to carry over some of their capital budgets to future years, which in theory should reduce the incentive to spend every last penny of their allocation in-year. In practice, a great deal of activity seems to take place in March, while April and May appear to be much quieter.

Of course, it is possible that our concerns about the quality of government’s investment delivery process are not fully justified. There could after all be some very good reasons as to why the winter months are the best time for carrying out public capital works!

ICAEW chart of the week: Housing sales

The ICAEW chart of the week this week is on the topic of the residential housing market, one of the swathe of economic statistics published by the Office for National Statistics last week. 

While there is often great interest in what is happening to house prices, data on the number of transactions tends to get less publicity – despite perhaps being more important to the economy. After all, people moving home often generate a great deal of additional economic activity, such as redecorating and buying new furniture.

There were 856,000 housing sales in the year ended 30 September 2018, down from 948,000 in 2016 and 36% lower than the pre-crisis peak of 1,340,000 in 2007.

Much of the decline in the volume of transactions has been put down to the weak economic recovery, with low real family incomes making it difficult for many to buy, despite extremely low mortgage rates. Another culprit may be stamp duty, a friction in the housing market as it significantly increases the cost of moving home.

The total value of the transactions in 2018 was £253bn, meaning that the average price paid for house in England & Wales was £296,000.

The statisticians prefer to focus on the median value, which was £232,000 in 2018. The ONS uses this to calculate affordability, with the ratio to gross annual earnings at 7.83 in 2018, up from the 7.77 seen in 2017. Surprisingly this is higher than the 7.17 calculated for the peak in 2007, which in turn was significantly higher than the ratio of 4.13 back in 2000.

With politicians of all parties keen to increase housing supply, the hope is that more people will be able to get on the housing ladder and the volume of transactions will start to increase again. Whether that will actually happen remains to be seen.